5 Dividend Stocks To Buy, 5 To Avoid

As the focus on dividend stocks remains, there may be a concern as to whether there is a dividend bubble being created. Matt Koppenheffer of the Motley Fool sets out to address this issue. He claims there is no dividend bubble. He found that on average dividend stocks in the S&P 500 currently have a higher yield, a lower valuation, and a lower payout ratio than they've had over the past 10 years. He concludes that while there may be individual stocks that are over priced, this is not generally true.

On the back of this, Matt goes on to select five dividend stocks to buy and five to avoid.

His five to buy are those who have a sustainable payout ratio and a reasonable valuation.

This highlights the problem of overpriced stocks -- they became overpriced because their returns have been strong and this shows up in this chart. It looks as if the dividend stocks not to buy have a great future behind them and the stocks to buy have an uncertain future in front of them. Over the long term, the returns and the risk aren't really ones that are appealing.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

Knowing what I know from the report -- that the stocks not to buy are expensive and have unsustainable payout ratios, I would be hesitant to invest in them. The ones to buy aren't compelling enough for me to want to go forward. I would want to investigate other dividend stocks (as we are doing in our dividend stock playoff articles) to see if there are better alternatives.

We will continue to track these stocks but this filter is not one I would use.

Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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